Saturday, August 24, 2013

Saudi’s ‘crude’ range, Fitch on Abu Dhabi & more

Petroleum economists are wondering if we have crossed a gateway to crude chaos? The magnificent one pictured (left) here in Abu Dhabi's Capital Garden is certainly no metaphor for the situation. Egypt is burning, Libya is protesting and US/UK/NATO are threatening [almost direct] action against Syria.

Add the US Federal Reserve's current stance on QE to the geopolitical mix and you get a bullish Brent price. Yes, yes, that's all very predictable. But when bulls run amok, all attention usually turns to Aramco's response. It is a well known fact that the Saudis like the crude oil price to remain within what economists prefer to describe as the "middle" ground. (You want your principal export to be priced high enough to keep you ticking, but not so high as to drive importers towards either consuming less or seeking alternatives).

Investment house Jadwa's research often puts such a Saudi comfort zone in US$80-90 per barrel price range. The Oilholic has been banging on about the same range too, though towards the conservative lower end (in the region of $78-80). The Emiratis would also be pretty happy with that too; it's a price range most here say they’ve based their budget on as well.

A scheduled (or "ordinary") OPEC meeting is not due until December and in any case the Saudis care precious little about the cartel's quota. Hints about Saudi sentiment only emerge when one gets to nab oil minister Ali Al-Naimi and that too if he actually wants to say a thing or two. As both Saudi Arabia and UAE have spare capacity, suspicions about a joint move on working towards a "price band" have lurked around since the turn of 1990s and Gulf War I.

Aramco's response to spikes and dives in the past, for instance the highs and lows of 2007-08 and a spike during the Libyan crisis, bears testimony to the so called middle approach. Recent empirical evidence suggests that if the Brent price spikes above $120 per barrel, Aramco usually raises its output to cool the market.

Conversely, if it falls rapidly (or is perceived to be heading below three digits), Aramco stunts output to prop-up the price. The current one is a high-ish price band. Smart money would be on ADNOC and Aramco raising their output, however much the Iranians and Venezuelans squeal. For the record, this blogger feels it is prudent to mention that Aramco denies it has any such price band.

Away from pricing matters, Fitch Ratings has affirmed Abu Dhabi's long-term foreign and local currency Issuer Default Ratings (IDR) at 'AA' with a Stable Outlook. Additionally, the UAE's country ceiling is affirmed at 'AA+' (This ceiling, the agency says, also applies to Ras al-Khaimah).

In a statement, the agency said, oil rich Abu Dhabi has a strong sovereign balance sheet, both in absolute terms and compared to most 'AA' category peers. To put things into perspective, its sovereign external debt at end of Q4 2012 was just 1% of GDP, compared to Fitch's estimate of sovereign foreign assets of 153% of GDP. Only Kuwait has a stronger sovereign net foreign asset position within the GCC.

With estimated current account surpluses of around double digits forecast each year, sovereign net foreign assets of Abu Dhabi are forecast to rise further by end-2015. Fitch also estimates that the fiscal surplus, including ADNOC dividends and ADIA investment income, returned to double digits in 2012 and will remain of this order of magnitude for each year to 2015.

Furthermore, non-oil growth in the Emirate accelerated to 7.7%. This parameter also compares favourably to other regional oil-rich peers. Help provided by Abu Dhabi to other Emirates is likely to be discretionary. Overall, Fitch notes that Abu Dhabi has the highest GDP per capita of any Fitch-rated sovereign.

However, the Abu Dhabi economy is still highly dependent on oil, which accounted for around 90% of fiscal and external revenues and around half of GDP in 2012. As proven reserves are large, this blogger is not alone in thinking that there should be no immediate concerns for Abu Dhabi. Furthermore, Fitch's conjecture is based on the supposition of a Brent price in the region of $105 per barrel this year and $100 in 2014. No concerns there either!

Just a couple of footnotes before bidding farewell to Abu Dhabi – first off, and following on from what the Oilholic blogged about earlier, The National columnist Ebrahim Hashem eloquently explains here why UAE's reserves are so attractive for IOCs. The same newspaper also noted on Friday that regional/GCC inflation is here to stay and that the MENA region is going to face a North-South divide akin to the EU. The troubled "NA" bit is likely to rely on the resource rich "ME" bit.

Inflation certainly hasn’t dampened the UAE auto market for sure – one of the first to see the latest models arrive in town. To this effect, the Oilholic gives you two quirky glimpses of some choice autos on the streets of Abu Dhabi. The first (pictured above left) is the latest glammed-up Mini Cooper model outside National Bank of Abu Dhabi's offices, the second is proof that an Emirati sandstorm can make the prettiest automobile look rather off colour.

Finally, a Bloomberg report noting that Oil-rich Norway had gone from a European leader to laggard in terms of consumer spending made yours truly chuckle. Maybe they should reduce the monstrous price of their beer, water and food, which the Oilholic found to his cost in Oslo recently. That's all from Abu Dhabi, its time to bid the Emirate good-bye for destination Oman! Keep reading, keep it 'crude'!

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© Gaurav Sharma 2013. Photo 1: Entrance to Capital Garden, Abu Dhabi, UAE Photo 2: Cars parked around Abu Dhabi, UAE © Gaurav Sharma, August, 2013.

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